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Do decreasing hazard functions for price changes make any sense?

  • Luis J. Álvarez


    (Banco de España)

  • Pablo Burriel


    (Banco de España)

  • Ignacio Hernando


    (Banco de España)

A common finding in empirical studies using micro data on consumer and producer prices is that hazard functions for price changes are decreasing. This means that a firm will have a lower probability of changing its price the longer it has kept it unchanged. This result is at odds with standard models of price setting. In this note a simple explanation is proposed: decreasing hazards may result from aggregating heterogeneous price setters. We show analytically the form of this heterogeneity effect for the most commonly used pricing rules and find that the aggregate hazard is (nearly always) decreasing. Results are illustrated using Spanish producer and consumer price data. We find that a very accurate representation of individual data is obtained by considering just 4 groups of agents: one group of flexible Calvo agents, one group of intermediate Calvo agents and one group of sticky Calvo agents plus an annual Calvo process.

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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0508.

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Length: 47 pages
Date of creation: Apr 2005
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Handle: RePEc:bde:wpaper:0508
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